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Give youth a chance

Infrastructure won’t achieve the scale to match its growing appeal unless investors throw more weight behind the new kids on the block.

Fundraising exercises are like general elections. Politicians and fund managers alike have to prepare for a new cycle before the current one is even finished, and do their outmost to convince the audience that whatever promises they make are as attractive as they are realistic. Success only comes after several months of intense campaigning, when voters tick the right box on the ballot paper – or entrust candidates with their cash. 

Mirroring the victory of the UK’s Conservative party last week, incumbent infrastructure fund managers have of late had little trouble winning support from their electorate. Earlier this month, we revealed that iCON Infrastructure had reached the €800 million hard cap of its third fund in just three months; Blackstone’s second energy vehicle, which the US firm says was oversubscribed, closed on $4.5 billion in February. That came after a year that saw the likes of Antin Infrastructure Partners, Macquarie Group and Infracapital pass a similar test with flying colours.

The picture is less rosy for debut fund managers. There are notable successes also in that segment of the market: take I Squared, which closed the largest first-time vehicle since 2009 last month, or Old Ironsides, which beat its target for its maiden fund the same month. But several advisers we recently spoke with confirmed that many of them are finding it hard to gain traction. 

Two main factors explain this. While investors are ever more eager to put money in infrastructure, they are also growing more sophisticated in their understanding of the asset class, prompting them to ask increasingly tough questions. They want to be able to assess a track record, understand how a team works together, and be confident there’s sufficient manpower and skills in the back office to support its members. The relative scarcity of investable infrastructure assets makes them even more inquisitive in their efforts to make sure a manager can originate and execute well. This is obviously harder to judge in the case of first-time funds.

From the standpoint of investors, such caution is understandable – but also regrettable. A fresh wave of fund managers is needed: while the amount raised by incumbent firms has increased, the number of new managers hasn’t followed suit. That would be fine if this increase in scale made the universe big enough for every would-be LP to meet its allocation target. Unfortunately this is not the case: a number of investors, newer to the market, are frustrated that blue-chip funds are often closed before they can even take their check book out of their pockets. 

A refreshed, more diverse manager universe would bring greater competition in areas that are not extensively covered, such as the opportunistic end of the market, thereby improving terms and access for investors looking for such exposure. A growing supply-demand gap also exists in the mid-market segment, which is getting sparser as existing firms raise bigger funds. 

There’s plenty of resources out there for new fund managers to tap into. Lots of expertise still resides in the broader infrastructure industry that could be fruitfully used to establish newcomers, either within advisers’ teams or within international groups. Consultants are also investing more to establish units dedicated to the asset class – though some wonder whether their efforts are sustained enough to catch up with current investor appetite. 

In this context it is therefore up to fund managers to come up with attractive propositions. Building a seed portfolio before starting to raise is a possible solution, provided its size is both meaningful and proportionate to the total amount of capital the team subsequently hopes to raise. Having a cornerstone investor gives a serious head start, especially if they bring relevant skills and contacts to the table. This is also true when first-time teams act as the independent arm of a larger group with experience of private markets. 

Yet for all this, first-time fund managers won’t succeed in their campaign without investor support. As in politics, a system where only the biggest and most established groups get to win often leaves less entrenched interests underrepresented. For the sake of the asset class as for their own, it is now time for LPs to make a reasoned leap of faith.